The Tax Effects of Storm Damage

Last month’s North Lakes Now cover warned readers of the damaging effects storms could have.

This prompted us to think we should write an article on how the taxation system treats money spent on damages when businesses or rental properties are affected.

Tax law essentially breaks rectification work into two broad categories: Repairs or Improvements. Repairs are generally fully tax deductible. Improvements generally aren’t. Also damages to Plant and Equipment (like machines) and Fixtures and Fittings (like carpets and desks) differ under tax law to damage to buildings.

So, what’s a repair? Generally if something is damaged and you replace like with like, that’s considered a repair. If a storm damages a tiled roof and its then fixed with the same or similar tiles, that’s a repair and is fully tax deductible. But if its replaced it with a colour bond or tin roof, that’s an improvement and may need to be depreciated.

If you conduct a project that includes both repairs and improvements to your property, you can only claim an income tax deduction for the cost of your repairs if you can separate the cost of the repairs from the cost of the improvements.

If you hire a builder or other professional to carry out these works for you, we recommend you ask for an itemised invoice to help work out your claim.

The cost of both repairs and improvements generally includes GST so if your Business is registered, it gets to claim the GST credit on the repair invoice(s).

Finally, if you’re going to claim the cost of storm damage on your insurance, then that’s a whole new set of tax rules.

It can sometimes become very tricky working out how rectification costs should be classified so as always, before undertaking any work, check with a qualified Accountant, Tax Agent or Lawyer for the correct treatment before you start. Good advice will save you a fortune in tax.